Stock Analysis & Ideas

Penn National Gaming: Attractive Long-Term Outlook

It’s been a bit of a roller-coaster ride for Penn National Gaming (PENN) stock after it declared its fourth-quarter 2021 results on February 3. Its shares initially fell, as the numbers didn’t meet market expectations, but the stock has rallied in the last week. Despite missing earnings estimates, the company’s top and bottom lines have shown improvement year-over-year.

Moreover, it had also witnessed strong performance across all its segments owing to its strong capabilities. I think the stock is a good bargain at this price point. I am bullish on PENN.

Penn National Gaming is one of the largest and most diversified regional gaming companies operating in the United States. It operates brands such as Hollywood, Ameristar, and L’Auberge and manages 44 facilities in 20 states across the U.S. and Canada.

Penn has both retail sports betting facilities as well as online social casinos, bingo, and iCasino products. To leverage its sports betting portfolio further, it had partnered with Barstool Sports last year to launch its online sports betting app in several states.

The regional casino giant’s strong attributes, such as its omnichannel strength, access to the latest technology, and improved marketing abilities, have helped it in achieving a leading position in the industry. Additionally, the contributions from its Barstool-branded retail sportsbooks have further solidified its position in the market.

In the coming years, the company intends to integrate Barstool Sportsbook with theScore media app to attract a greater audience and thus bolster its growth further. Therefore, if things go as planned in the future, the company’s investors will be rewarded significantly.

Attractive Revenues despite Missing Earnings Estimates

In general, Penn had completed its fourth quarter on a strong note but had missed the market’s earnings estimates for the second straight quarter. The sports betting firm posted earnings of ~$45 million during the fourth quarter, translating to earnings per share of $0.26. A similar pattern was observed a quarter ago when it was expected to post higher earnings per share but ended up delivering earnings of $0.52 per share.

Though both the earnings and net margins of the company improved in 2021 compared to 2020, one can’t ignore the fact that out of the last four quarters, it was able to surpass the earnings per share estimates only twice.  

Leaving earnings aside, Penn’s revenues have consistently been quite attractive. In the fourth quarter, the company showed a revenue of $1.6 billion, representing an increase of $545.1 million year-over-year and $231.3 million over the last two years. The best part was it was able to top the revenue estimates in all the past four quarters.

Further, Penn’s adjusted EBITDA came at $369 million, indicating an increase of 113.1 million year-over-year and $65 million compared to 2019, while its adjusted EBITDAR margin was 30.6% against the 35.6% and 29.8% it had achieved respectively during 2020 and 2019.

Penn had made some substantial capital investments like the launching sports betting operations in Iowa and West Virginia or the integration of theScore, for which it had to sustain losses despite earning greater revenues. These investments are necessary for the company’s future prospects keeping in mind the frenzied competitive environment it is surviving in and therefore seems justified.

The company wants to focus on sustainable growth, organic customer acquisition, and targeted marketing and promotional spending. In the current year, Penn intends to earn a net revenue between $6.07 billion to $6.39 billion along with an adjusted EBITDAR between $1.85 billion to $1.95 billion, respectively.

Wall Street’s Take

Turning to Wall Street, PENN stock comes in as a Moderate Buy. Nine out of 15 analysts have given PENN a Buy rating, whereas another six have suggested a Hold on its shares.

The average Penn National Gaming price target is $62.80, which implies 25% upside potential.

The Bottom Line on PENN Stock

Penn might not have outperformed the market recently, but the stock really has got an attractive long-term outlook. Reports suggest that the online gambling market might reach $127.3 billion in value by 2027, increasing at a CAGR of 11.5% between 2020 to 2027, thereby indicating a huge growth opportunity for the company.

Moreover, Penn’s growth spree is outstanding. Last year it expanded its footprint to 20 gaming jurisdictions by striking an attractive deal with Gaming and Leisure Properties to acquire the operations of Hollywood Casino Perryville. The purchase of Canada-based Score Media and Gaming and the launching of theScore Bet app for mobile wagers was another great move.

Still, there are certain problems. Two of the Big Four states are yet to allow sports betting, and New York and Michigan have recently passed laws allowing sports wagering, but Penn did not get approval to operate in New York. Yet considering the price point, the Penn stock does seem attractive at the present moment.

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